Fee or Free? Let Members Choose

Over the past few years, consumers have become more aware of the fees they pay for financial services.

Regulatory agencies have aimed legislation at reducing these fees, many banks have raised their account fees to reclaim lost noninterest revenue, and credit unions have used the “free” mantra to gain new members.

Fees are nothing new—they’re an integral part of how financial institutions fund services consumers need. So how do we continue to generate fee revenue in a fee-averse environment?

To meet this challenge, credit unions should make product pricing decisions with the goal of creating activities that encourage cost-saving behaviors or generate fee income. By letting members choose whether to pay fees or engage in cost-saving behavior, the credit union becomes a partner with the member in “fee-avoidance.”

With this approach, credit unions clearly explain their services, including all potential fees—and a method for avoiding such fees.

A checking account, for example, may have a monthly fee that can be avoided when the member sets up direct deposit, uses bill pay, and makes a certain number of debit card transactions each month.

These fee-avoidance activities ensure the member uses the account, incent cost-saving behaviors that offset the cost of providing the account, and create “sticky” relationships.

The idea of building solid member relationships isn’t new. But moving to a fee-avoidance approach rather than a “free” strategy will be new to many credit unions.

A fee-avoidance strategy protects the value of the services you offer members. When something is provided for free, it can too easily be viewed as having little or no value.

A fee-avoidance strategy involves a four-part approach: adding value-based (but not free) services; developing long-term relationships with members through multiple accounts/services; understanding members’ needs and expectations; and knowing what competitors offer and what the market will bear.

1. Add value
Let members select reasonably priced, value-added services that are important to them, such as remote deposit capture and unlimited foreign ATM transactions.

This “menu-based approach” allows members to choose the services they want for a small monthly fee.

2. Build relationships
A strong suite of checking products can be instrumental in generating revenue and deepening member relationships. Accounts should offer benefits or avoid fees for members that maintain larger balances or participate in services that reduce costs.

An interest-bearing checking account, for example, can work with other accounts to provide benefits such as discounts on loans, preferred deposit rates, and lower fees on other accounts.

Incenting cost-saving behavior can also build member relationships. For example, many institutions offer fee avoidance through participation in programs such as online bill pay and online statements.

3. Understand your members
Understanding members’ wants and needs is essential to making correct decisions about products and pricing. Monitor member sentiment by administering ongoing member satisfaction surveys.

It’s also useful to ask members to give feedback upon closing accounts to determine their reasons for leaving. And when developing new products and services, conduct informal focus groups and needs assessment surveys to better understand the member’s point of view.

It’s also important to monitor feedback before and after any fee changes. Beyond just listening, develop a strategy to educate members about fee avoidance.

When members understand the value of your services and how to avoid certain fees, they’re in control of their decisions. This makes fees more palatable.

4. Know your market
Understand the products and services your competitors offer, including their pricing and fee structures. This will help you better understand your own strengths and opportunities.

A competitive analysis could reveal, for example, that your institution has the lowest overdraft transfer fee in your market. This competitive advantage, once identified, could be an important selling point for your front-line staff or an opportunity to increase fee revenue with a pricing change that leaves your product competitive within your market.

Understanding your competition is essential. Pricing correctly to your market can help credit unions offer the optimal mix of products and services and know which fees to charge without alienating members.

Understanding members’ needs and having a clear picture of your competitive landscape is crucial to generating fee income in a fee-averse environment.